At the beginning of the year, the three best-performing stocks of 2015 were showing signs of technical fatigue, and the charts suggested they were preparing for a correction. Shares of Netflix (NFLX) , Amazon (AMZN) and Activision Blizzard (ATVI) went on to decline 30% over the next month, but since making their February lows, they've formed important basing patterns, indicating that the corrective action is over and they are ready to return to their previous positive trends.
These stocks have a history of leadership and outperformance, and the formation of the important technical reversal patterns and confirmed breakouts detailed in the following analysis is key to the sustainability and progression of the recent positive price action in the broader market.
At the end of last year, Activision was moving in a small horizontal channel above a four-month rising trend line. At the same time, moving average convergence/divergence was in bearish divergence to the price action, and Chaikin money flow had dipped into negative territory. The stock broke below the uptrend line and its 50-day moving average, quickly dropping under the 200-day average before forming a large hammer candle that marked the end of the decline.
Since then, it's formed a cup and handle reversal pattern below rim line resistance, currently intersecting in the $33 area with the 50-day moving average. In contrast to the technical action at the start of the pullback, daily moving average convergence/divergence, which is overlaid on a weekly histogram of the oscillator, is now trending higher on both timeframes. The aroon indicator, designed to identify shifts in the direction of trend by green over red line crossovers, has made a bullish crossover, and Chaikin money flow is in positive territory.
A successful pattern breakout projects a price target that retests the old highs.
The Netflix decline also began after the 50-day average and a support line were taken out. The stock went on to drop below the 200-day average before forming the bottom of its own cup and handle pattern with rim line resistance at the $95 level. It was able to move above pattern resistance and retake the 50-day moving average and then come back and hold the former resistance-now-support level, a successful retest which is generally considered a healthy technical sign.
Moving average convergence/divergence is moving higher on multiple timeframes, aroon is suggesting the start of an uptrend, and the money flow index, a volume-weighted relative strength measure, has moved above its centerline.
The stock has built a solid platform from which to return to its earlier positive trajectory.
The price and technical action before the Amazon breakdown resembles the pre-breakdown action on the previous charts, with horizontal price action and momentum indications in bearish divergence to price, followed by a break below the 50-day moving average and a recovery process after a breach of the 200-day average.
The basing consolidation this time, however, has taken the form of an inverse head and shoulders pattern, with neckline resistance at the $580 level. At the halfway point in the construction of the bullish reversal formation, there was a positive crossover on the moving average convergence/divergence oscillator and the aroon indicator, and Chaikin money flow trended up into positive territory. A confirmed break above the neckline projects another run back up to the old highs.